Ticker: NOV
Sector:
Basic Materials
Industry: Oil & Gas Equipment
& Services
Recommendation:
Sell
Pricing
Closing Price
52-wk High
52-wk Low
$43.13 (2/23/10)
$50.17 (10/19/09)
$23.79 (3/2/09)
Market Data
Market Cap
Total assets
Trading vol
$18.05B
$21.53B
5.100 M
Valuation
EPS (ttm)
P/E (ttm)
PEG
Div Yield
$3.52
12.8
1.10
0%
Profitability & Effectiveness (ttm)
ROA
6.85%
ROE
10.99%
Profit Margin 11.59%
Oper Margin 18.21%
Gross Margin 29.84%
National Oilwell Varco is in the part of the Basic Materials
sector and engaged in the everyday operations of Oil/Gas
drilling. The forecasting of oil price also seems positive for this
sector’s growth of stock price. Although it has strong financial
status, I feel we should sell NOV and transfer the fund to RIG
on the purpose of reducing the number of stocks and
concentrating more on smaller number of companies.
Company Overview
National Oilwell Varco is a multinational corporation whose
predecessors are Oilwell Supply (founded in 1862) and National
Supply (founded 1894). This company changed its name to
National Oilwell Varco (NOV) on March 14, 2005, following
the completion of the merger with Varco International. NOV, a
worldwide designer, manufacturer and marketer of
comprehensive systems and components used in oil and gas
drilling and production, as well as a provider of downhole tools
and services, also provides supply chain integration services to
the upstream oil and gas industry. The company estimates that
more than 90% of the mobile offshore rig fleet and the majority
of the world's larger land rigs (2,000 horsepower and greater)
manufactured in the past 20 years use drawworks, mud pumps
and other drilling components manufactured by NOV.
Three Main Components
To better understand the how the company operates it is vital to
know what each of three components of the company’s business
segments include:
Rig Technology
The rig technology segment manufactures, designs, and sells
drilling systems and components for both offshore and onshore
drilling rigs, as well as complete land drilling and well servicing
rigs. The components include drawworks, mud pumps,
traveling equipment, etc. and are designed primarily for
offshore, extended reach, and deep land drilling. The equipment
is installed on new rigs and often times is replaced during
refurbishing and upgrades of existing rigs. This segment
depends heavily on the capital spending plans of drilling
contractors, oilfield service companies, oil/gas companies, as
well as the overall level of drilling. In 2009, this segment
provided $8.1 Billion of the company’s $12.7 Billion revenues
and $2.3 billion of the company’s $2.3 billion operating income
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which shows this segment has historically been the leading segment of revenue. As of December
31, 2009, total backlog in this segment was about $6.4 billion, down 42% from a year earlier
Petroleum Services & Supplies
The Petroleum Services/Supplies segment manufactures, designs, and sells a variety of
consumable goods and services used in the drilling, completion, and remediation of gas/oil wells,
pipelines, flowlines, and other goods involving tubing. Many of the products include pumps,
control systems, downhole tools, and drilling motors. Services in this segment depend heavily
on the level of oilfield drilling and workover activity done by drilling contractors, major and
independent oil/gas companies, and national oil companies. Following the April 2008 acquisition
of Grant Prideco, this segment now offers drill pipe and drill bits. In 2009, this segment
generated $3.7 Billion of the company’s $12.7 Billion revenue and $453 million of the
company’s $2.3 billion operating income.
Distribution Services
The distribution services segment operates a network of distribution service centers. These
distribution service centers stock and sell a variety of expendable items for oilfield applications
and spare parts to drill site and production locations around the world. As oil and gas companies
have refocused on their core competencies to reduce costs and capital requirements, NOV has
expanded its outsourcing and alliance arrangements, which include comprehensive procurement,
inventory management, and logistics support. The company has a comprehensive network of
field locations supporting land drilling operations throughout North America, and also provides
support to contractors performing offshore drilling in locations such as: Mexico, the Middle East,
Europe, Southeast Asia, and South America. For 2009, this segment contributed $1.4 Billion in
revenues and $50 million in operating income..
2009 Outlook (After 2nd Quarter)
Oil/Gas Outlook
NOV’s future revenues will depend on the willingness of oil and gas operators to make capital
investments to explore for and produce oil; which in turn are influenced by numerous factors
including: the ability of OPEC members to maintain oil price stability, the level of production by
non-OPEC countries, supply and demand of oil/gas, and other things that the company cannot
control. The world oil market should gradually tighten in 2010 and 2011, as the global economic
recovery continues and world oil demand begins to grow again. Continuation of the production
targets set by the Organization of the Petroleum Exporting Countries (OPEC), as well as lower
overall growth in non-OPEC supply over the 2010-2011 forecast period, would also contribute to
a firming of crude oil prices to above $80 per barrel this summer. The West Texas Intermediate
(WTI) spot price increased from $69.48 per barrel on December 14 to $83.12 on January 6 and
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then fell to $72.85 on January 29. EIA expects the crude oil market to strengthen again this
spring with WTI rising to an average of about $81 per barrel over the second half of this year and
$84 per barrel in 2011. EIA's forecast assumes that U.S. real gross domestic product (GDP)
grows by 2.3 percent in 2010 and by 2.5 percent in 2011, while world oil-consumption-weighted
real GDP grows by 2.7 percent and 3.6 percent in 2010 and 2011, respectively.
West Texas Intermediate (WTI) Crude Oil Price
200
180
Historical spot price
STEO price forecast
160
140
120
100
80
60
40
20
0
Jan 2009 Jul 2009 Jan 2010 Jul 2010 Jan 2011 Jul 2011
Recent Acquisitions
In December 2007, NOV announced an agreement to acquire oilfield services rival Grant
Prideco for approximately $7.2 billion in cash and stock. The deal was completed in April 2008.
In March 2005, the company issued 0.8363 shares of National-Oilwell common stock in
exchange for each common share of Varco, and changed the name of the company to National
Oilwell Varco.The total purchase price was $2.59 billion. Excluding the Varco acquisition, NOV
paid $20.7 million for other acquisitions in 2005, and $2.8 million in 2004. In January 2003, the
company acquired the Mono pumping products business from Halliburton, for about $91 million,
and made eight other acquisitions, totaling $54 million in cash outlays; these latter acquisitions
largely expanded the Distribution segment.
Risk Factors affecting NOV
 The ability of the members of the Organization of Petroleum Exporting Countries, or
OPEC, to maintain price stability through voluntary production limits, the level of
production by non-OPEC countries and worldwide demand for oil and gas
 Cost of exploring for and producing oil and gas
 national government political requirements
 Volatile oil and gas prices
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




Worldwide economic conditions
Level of drilling
National Government political requirements
Alternate energy development
Exchange rate loss, as 66% of revenues come from outside U.S
National Oilwell Varco vs. Transocean
Relation to Oil/Gas Industry Index
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Financials
NOV is among the least leveraged companies in the Oil Well Services and Equipment industry
and has a debt to total capital ratio of 5.84% which is very small comparing the other companies
in this sector. With an interest Coverage ratio of 60.8 and a Quick ratio of 1.46, the company
should be able to comfortably repay its debt. But comparing with Transocean, I could not see any
better position in NOV than RIG.
Recommendation
There is significant correlation between oil price and companies’ stock price in energy sector.
Since most of researches are forecasting the rising of gas price with economic recovering, it
seems obvious that NOV will perform very well in short term. But comparing with Transocean, I
could not find any better position in firm valuation, growth rates and effectiveness than
Transocean. Therefore I strongly recommend a sell on NOV and transferring that fund to RIG
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